Globalization and Emerging Markets: With or Without Crash?

Article Citation

Martin, Philippe, and
Hélène Rey. 2006. "Globalization and Emerging Markets: With or Without Crash?"
American Economic Review,
96(5): 1631-1651.

DOI: 10.1257/aer.96.5.1631

Abstract

We analyze the effects of financial and trade globalization on the likelihood of
financial crashes in emerging markets. While trade globalization always makes
crashes less likely, financial globalization may make them more likely, especially
when trade costs are high. Pessimistic expectations can be self-fulfilling and lead to
a collapse in demand for goods and assets. Such a crash comes with a current
account reversal and drops in income and investment. Lower-income countries are
more prone to such demand-based financial crises. A quantitative evaluation shows
our model is consistent with the main stylized facts of financial crashes in emerging
markets. (JEL F12, F32, F37, F41, O16)